KARACHI: A rising demand for interest-free banking has increased the assets of Pakistan’s Islamic banking industry by over 600 percent in the last decade, central bank figures show, with the State Bank stepping up its push to develop the sector and encourage lenders to expand their operations in the world’s second most populous Muslim nation.
Islamic banks follow religious principles such as bans on interest and pure monetary speculation, ruling out the use of interest-based financial instruments such as bonds and treasury bills.
Pakistan was one of the first countries to introduce Islamic banking at a national level in the 1970s. Since December 2010, its assets have grown by 610 percent from Rs 477 billion to Rs 3.36 trillion in March 2020, State Bank data shows, and deposits during the same period increased by 590 percent to Rs 2.7 trillion from Rs 390 billion.
Islamic finance now holds 15.2 percent of all banking assets in Pakistan and 17 percent of all bank deposits, which the government wants to increase to 25 percent by 2023 under the National Financial Inclusion Strategy for Islamic Banking. The overall deposits of Pakistani banks stood at Rs 16.23 trillion in Jun 2020.
“There is very strong demand for interest-free banking, 95 percent of Pakistan’s Muslims want banking without interest,” Ahmed Ali Siddiqui, a senior executive vice president at Meezan Bank, Pakistan’s first shariah-compliant commercial bank, told Arab News. “The customers prefer full-fledged Islamic banking instead of a window offering shariah-compliant financial products.”
Islamic finance has taken great strides around the world in this century, with sharia-compliant financial assets forecast to total $3.8 trillion by 2022, according to a Thomson Reuters report. That’s up from $2.2 trillion in 2016, with around 1,400 Islamic financial institutions now operating across 80 countries.
Pakistan’s government believes it can pull more people into the formal banking sector — especially in rural areas — by expanding the Islamic finance sector, and this could boost economic growth. Over 98 percent non-banked people in Pakistan believe in the religious prohibition of interest while over 93 percent think banks should be prohibited from charging or giving interest, according to a survey conducted by the central bank in 2014.
In 2016, Sharia-compliant banks in Pakistan held 11.4 percent of total banking assets, barely changed from a year ago.
To help improve this, the government introduced a 2 percent tax rebate for sharia-compliant manufacturing firms in July 2016 to encourage them to eliminate interest-bearing debt from their balance sheets. The central bank also exempted Islamic banks from using interest-based benchmarks for some financing products.
In 2017, Pakistan’s central bank issued incentives and guidelines covering how banks that wanted to be fully-fledged sharia compliant could achieve that status, setting a three-year time frame for applicants to complete the process.
Pakistan currently has five full-fledged Islamic banks while 17 conventional banks have standalone Islamic banking branches (IBBs) with 3,250 branches offering financial products. Conventional banks also operate Islamic Banking Windows (IBWs) but were previously barred from offering limited products. Last week, however, the central bank allowed IBWs to offer all types of financing products to customers including corporates, small and medium sized enterprises, agriculture, housing, and consumers.
“This facility is subject to the condition that respective IBW branch shall be converted into full-fledged Islamic banking branch within a period of three years,” SBP said in a statement.
Meezan Bank’s Siddiqui said the three-year limit was “too long.”
“Customer preference and demand trend calls for quicker conversion into the full Islamic branch,” he said, adding that the sale of interest-based products at a counter at a conventional bank confused customers who believed “it should be either completely conventional or Shariah compliant.”
The central bank has also tasked IBWs to increase their assets by 10 percent in the next three years and convert to full-fledged Islamic banking branches.
“More than 60 percent market share of the Islamic banking sector is with full-fledged Islamic banks while remaining share is held by the banking branches and IBWs of conventional banks,” Siddiqui said.
“The banks are willing to convert their branches into full fledged Islamic branches because the rate of return is also higher than conventional banks and the strong ideological demand also exists,” Syed Fawad Basir, a banking analyst at Topline Securities, said, adding that it was hard to say yet if Islamic banking would “overtake conventional banking very soon.”